The RBI left interest rates unchanged on Monday but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled reforms to boost growth and improve its fiscal position.
The Reserve Bank of India left the policy repo rate at 8 percent, in line with expectations in a Reuters poll on Friday before the government unexpectedly announced measures to allow foreign direct investment in industries, including supermarkets and airlines.
On Thursday, the government announced a sharp increase in the price of diesel, which is heavily subsidised.
Following are highlights from the monetary policy review:
* Keeps repo rate unchanged at 8 percent.
* Reverse repo stays at 7 percent.
* Cash reserve ratio cut by 25 basis points to 4.50 percent, effective from the fortnight beginning September 22.
* Statutory Liquidity Ratio stays at 23 percent of deposits.
* Primary focus of monetary policy remains containing inflation and anchoring inflation expectations.
* Even as demand pressures moderate, supply constraints and rupee depreciation are imparting pressures on prices.
* As policy actions to stimulate growth materialise, monetary policy will reinforce the positive impact of these actions while maintaining its focus on inflation management.
* Government’s recent actions have initiated a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI).
* See pressures on inflation in the short term due to upward revision in diesel prices and rationalisation of LPG subsidy.
* Revisions in diesel prices and LPG subsidy were anticipated at the time of April policy.
* Risks from global factors, in terms of both capital movements and oil prices, will persist.
* Outflows toward advance tax payments and the onset of festival-related currency demand could accentuate pressures on liquidity over the next few weeks.
* Wedge between deposit growth and credit growth could widen on the back of the seasonal pickup in credit demand in the second half of the year.
* Persistent inflationary pressures alongside risks emerging from twin deficits, constrain a stronger response of monetary policy to growth risks.